BULGARIAN ENERGY FORUM 2012 REGIONAL ENERGY CONFERENCE

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Polish energy strategy for national energy security – versus European ROADMAP 2050.

Sofia, December 11th.., 2012

BULGARIAN ENERGY FORUMBULGARIAN ENERGY FORUM20122012

REGIONAL ENERGY CONFERENCEREGIONAL ENERGY CONFERENCE

„„ENERGY DEVELOPMENT IN THE ENERGY DEVELOPMENT IN THE CHANGING WORLD – CHANGING WORLD –

STRATEGIES, CHALLENGES AND STRATEGIES, CHALLENGES AND OPTIONSOPTIONS””

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““Polish energy strategy for national Polish energy strategy for national energy security – versus European energy security – versus European

ROADMAP 2050”ROADMAP 2050”Andrzej SikoraAndrzej Sikora PhD. Eng. PhD. Eng.

Sheraton Hotel BalkanSofia,

December 11-12, 2012

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DisclaimerDisclaimer

The information on which this presentation is based derives from our own experience, knowledge, data and research.

The opinions expressed and interpretations offered are those of Energy Studies Institute

and have been reached following careful consideration. However, the Oil&Gas business is characterized by much uncertainty and all of our comments and conclusions should be taken in that light.

Accordingly, we do not accept any liability for any reliance which our clients may place on them.

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AGENDAAGENDA

Few words about European forecasts for natural gas

Current market players and new possible clients for hydrocarbons in the EU

New demand – is energy generation the only possible ways for new gas?

No place for nuclear, no place for coal Common European Energy Market based on natural gas instead of renewables?

Will unconventional gas break the trend and Poland is ready to lead the European quest for gas independence?

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Understanding greenhouse gases

„Water vapor: The main greenhouse gas is water vapor (H₂O), which is responsible for about two-thirdstwo-thirds of the natural greenhouse effect. In the atmosphere, water molecules capture the heat that the earth radiates and then re-radiate into all directions, warming earth’s surface, before it is eventually radiated back to space. Water vapor in the atmosphere is part of the hydrological cycle, a closed system circulating water – of which there is a finite amount on earth - from the oceans and land to the atmosphere and back again through evaporation and transpiration, condensation and precipitation. Human activities do not add water vapor to the atmosphere. Human activities do not add water vapor to the atmosphere. However, warmer air can hold much more moisture, so increasing temperatures further intensify climate change.

Methane: The second-most important greenhouse gas for the enhanced greenhouse effect is methane (CH₄). Since the beginning of the Industrial Revolution, atmospheric methane concentrations have doubled and contributed some 20% to the enhancement of the greenhouse gas effect. In industrialized countries, methane accounts typically for 15% of greenhouse gas emissions. Methane is created predominantly by bacteria that feed on organic material where there is a lack of oxygen. It is therefore emitted from a variety of natural and human-influenced sources, with manmade emissions accounting for the majority. Natural sources include wetlands, termites, and oceans. Human-influenced sources include the mining and burning of fossil fuels, livestock husbandry (cattle eat plants that ferment in their stomachs, so they exhale methane and their manure contains it), rice cultivation (flooded paddy fields produce methane since organic matter in the soil decomposes without sufficient oxygen) and landfills (again, organic waste decomposes without sufficient oxygen). In the atmosphere, methane traps heat and is 23 times In the atmosphere, methane traps heat and is 23 times more effective at that than CO₂more effective at that than CO₂

Carbon dioxide: The main contributor The main contributor to the enhanced (manmade(manmade) greenhouse effect is carbon dioxide (CO2). Globally, it accounts for over 60% of the enhanced greenhouse gas effect. In industrialized countries, CO₂ makes up more than 80% of greenhouse gas emissions. (Oceans absorb CO₂ which, in dissolved form, is used by marine life in photosynthesis.) Recently, European researchers discovered that current concentrations of CO₂ in the atmosphere are higher now than at any time during the past 650,000 years. Ice cores were drilled from a depth of more than 3km in the Antarctic ice, which formed hundreds of thousands of years ago. The ice contains air bubbles that provide a history of atmospheric compositions from different ages in the earth’s history”.

http://ec.europa.eu/clima/sites/campaign/pdf/gases_en.pdf

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Understanding greenhouse gases

Agriculture 10%Energy use excl.transport 21%Transport 61%Waste 2%Industrial processes 6%

"America's First Steam Locomotive, 1830", EyeWitness to History, www.eyewitnesstohistory.com (2005)http://www.eyewitnesstohistory.com/tomthumb.htm.

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How it works?How it works?

1865 The Locomotive Act 1865 (popularly known as the Red Flag Act) imposes a speed limit of 2mph in cities, towns and villages, and 4mph elsewhere. Also requires a pedestrian carrying a red flag

in front of the vehicle at a distance of 60yds. The vehicle was required to have three drivers aboard it.

1878 The Locomotive Amendment Act 1878 made the red flag optional under local conditions and reduced the distance of the warning red flag

to 20 yards.

1879 George B. Selden, a patent lawyer and inventor who never manufactured a motor vehicle, filed patent on a 'road engine'. The high speed internal combustion engine was yet to be invented, and Selden managed to keep the patent 'pending' for over 15 years--it issued as United States patent number 549,160 in 1895. He and his Association of Licensed Automobile Manufacturers (formed 1903) attempted to enforce a strict monopoly on motor manufacturing. Henry Ford (among others) infringed the patent, and in 1911 achieved a ruling which overturned the attempted monopoly.

1885 Sylvanus F Bowser invents the petrol delivery pump […]

””However beautiful the strategy, However beautiful the strategy, you should occasionally look at the you should occasionally look at the results”results”

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Unconventional gas sources

Dry, sweet natural gas with highmethane content• wet, sour gas• condensate• Gas from the zones of extreme pressure

Gas from coal seams (Coalbeds)• Gas from tight sands (tight gas)• Gas from shale (Devonian shales)• Gas Hydrates

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Geology of oil and gas - a summary

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Geology of oil and gas - a summary

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How big worldwide is yearly How big worldwide is yearly unconventional gas unconventional gas

production today?production today? 50 bcm

250 bcm

450 bcm

900 bcm

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European forecasts for natural gas European forecasts for natural gas

Source: www.entsog.euAndhttp://ec.europa.eu/energy/energy2020/roadmap/doc/roadmap2050_ia_20120430_en.pdf

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ROADMAP 2050 Key points: ROADMAP 2050 Key points: (no unconventional gas in Europe and (no unconventional gas in Europe and

global climate deal being agreed)global climate deal being agreed)

The 2050 target means a 32 – 41% reduction in primary energy demand achieved by: Energy EfficiencyEnergy Efficiency: all sectors including buildings and households, but without identifying how it will meet the high de carbonisation targets. Diversified Supply TechnologiesDiversified Supply Technologies: there are 3 related scenarios:- driven by carbon pricing and that both nuclear and

carbon capture and storage (CCS) are publicly accepted;- assuming CCs is delayed and nuclear fills the gap based on carbon prices;- no new nuclear with more CCS (32% in power generation);Renewable Energy Sources:Renewable Energy Sources: 75% in gross final energy consumption and 97% in electricity consumption.

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ROADMAP 2050 Key points: ROADMAP 2050 Key points: (no unconventional gas in Europe and (no unconventional gas in Europe and

global climate deal being agreed)global climate deal being agreed)

Source:“Roadmap for moving to a low-carbon economy in 2050” www.eurogas.com

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Present Day Rivers

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Present Day carbonate reefs

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Present day shale (Blue)

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Who dares duplicate Who dares duplicate the the American American unconventional gas unconventional gas revolutionrevolution ? ?

Source: Stanisław Rychlicki PGNiG S.A..

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Who dares duplicate the Who dares duplicate the American American unconventional unconventional gas revolutiongas revolution ?? Technology!Technology!

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Oil linked prices – GAZPROM (RussiaOil linked prices – GAZPROM (Russia)) ? ?Shale gas has moved to the bottom of the US gas supply curve.

Until recently, conventional gas was viewed as low-cost, while shale gas was an abundant but high-cost US resource – that perception has now reversed.

Source: Vello A. Kuuskraa, „Gas Shales Drive the Unconventional Gas Revolution”, Advanced Resources International, Inc., Washington Energy Policy Conference: The Unconventional Gas Revolution, March 9, 2010, Washington, D.C.

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How do we do any of this in an urban environment?

Seismic Operations in Urban areas

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How do we do any of this in an urban environment?

Production Operations in Urban areas

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The EU The EU Commission publishes new studies Commission publishes new studies on unconventional gason unconventional gas

7th. September 2012

Three new studies on unconventional fossil fuels, in particular shale gas. The studies look at the potential effects of these

fuels on:a) energy markets, b) the potential climate impact of shale gas production, c) the potential risks shale gas developments and

associated hydraulic fracturing ("fracking") to human health and the environment.

„The study on energy market impacts shows that unconventional gas developments in the US have led to greater LNG supplies becoming available at global level, indirectly influencing EU gas prices.[…]”

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The importance of competition to make The importance of competition to make sshale hale economicaleconomical..

Cost reductions is a key…Cost reductions is a key…

The EU law – bureaucratic burden - local regulations; language differences

Local rig market is dominated by state-controlled companies – reducing the effect „competition on cost”

Extremely limited supply of key services -just few frac, geo seismic crews (travel needs)

Times of drilling = experience –> money !!! fast and efficient operations – proper equipment

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Lane Energy

PGNiG

ExxonMobilBNK Petroleum

Eni

Talisman Energy

Vabush Enenrgy Chevron

Talisman Energy

San Leon

Orlen Upstream

San Leon

Till now =>30 exploration wells and 7 hydraulic facturing only

Till end of 2012 =>34 new wells… (45 required by concessions)

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Stable and long term energy policyStable and long term energy policy

Strategic planning for coal industry Strategic planning for coal industry

Development of the gas market Development of the gas market

Pro-ecological solutions: Pro-ecological solutions: – CCS what forCCS what for ? ? – Nuclear – to expensiveNuclear – to expensive ??

Technology or support for an access to Technology or support for an access to high efficient & flexible technology and high efficient & flexible technology and servicesservices

Can Poland duplicate the unconventional gas Can Poland duplicate the unconventional gas revolution ? revolution ?

„„With a little help from my friends…”With a little help from my friends…”

Strategy at Strategy at first… first…

Existing and planned Existing and planned natural gas pipelines to the natural gas pipelines to the

WestWest

Source: Der Spiegel, January 2009

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Shale revolution in the US means petrochemicalsShale revolution in the US means petrochemicals

Source: ICIS Chemical Business Aug. 27th. 2012

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Shale gas influence - our view (1)

In the very optimistic scenario, the growth potential of natural gas consumption in Poland may be more than 15 billion m³ a year. Compared with the level of current consumption, we obtain a giant increase in demand, over 100%, but in the view of production growth from 40–80 billion m³ per year, this is not a volume that would give the adequate level of comfort for potential energy investors. However, we should keep in mind that only 100% gasification of the whole economy would be able to manage all or most of these volumes, and such a scenario is quite improbable. In the intermediate variant, the increase in demand for gas may be less than 5 billion m³ per year, which means that the domestic market potential would constitute a significant barrier to the development of gas production from unconventional sources. The largest increase in demand for natural gas may come from the backward energy sector based on solid fuels.

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On the basis of our knowledge regarding results of the first two boreholes (unofficial, no statements have been released) shale gas in Poland is a reality. However profitability of its production is at the moment unknown.We expect first economic assessments of the shale gas production in Poland to be determined and revealed in 2013 the earliest. Large scale production of shale gas in Poland would not take place before 2015-2016 (and only in case that significant reserves are discovered, and all abovementioned necessary preconditions fulfilled).Production volumes and economy of shale gas production – when determined – will allow to assess impact of domestic gas production on the Polish energy sector. Only then one will be able to foresee its influence on the future coal vs. gas energy generation.Therefore we do not expect any changes in the Polish Energy Policy at least until 2015. Afterwards shale gas may have an impact on the future energy mix. Its scale will be determined by the amount of domestic reserves and productivity of shale gas fields.However according to our estimations we believe that 7-10% of energy in Poland will be produced in gas-fired generators by 2020, and 15-20% by 2025.

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Shale gas production will not make Europe (the EU) self sufficient in natural gas. The best case scenario for shale gas development in Europe is one in which declining conventional production can be replaced and import dependence maintained at a level around 60%. Regarding trade flows, the structure of EU gas imports is very sensitive to the LNG cost assumptions.

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Multiple wells – simple and compact

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„Let the power and simplicity of natural gas rise the economy, open minds and will be the base for

sustainable energy future.”

Sofia 2012

Source: http://www.freewebs.com/tables4ethanol/MOLECULES/METHANE_CH4.bmp

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Questions ?Questions ?

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Thank you Thank you very muchvery much ! !

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Price arbitrage LNG vs. PipelinesPrice arbitrage LNG vs. Pipelines(supply competition ha(supply competition hass an effect on price movements an effect on price movements))

Source: Own graph based on Shell presentation

LNG vs. Long Haul PipelineLNG vs. Long Haul Pipeline20202020

SHALE PRICE:USA Breakeven equals US$3-7mBTUEU Breakeven equals US$5-12 mBTU

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European forecasts for natural gas European forecasts for natural gas

Source: http://ec.europa.eu/energy/gas_electricity/index_en.htmAndhttp://ec.europa.eu/energy/energy2020/roadmap/doc/roadmap2050_ia_20120430_en.pdf

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European forecasts – no econometric model! European forecasts – no econometric model!

Source: http://www.e3mlab.ntua.gr/e3mlab/index. 26/09/2011 Brussels E3MLAB

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BULGARIAN ENERGY FORUM 2012 REGIONAL ENERGY CONFERENCE